Poland, Czech manufacturing still slowing

By bne IntelliNews December 4, 2012

bne -

Purchasing Managers Index (PMI) data for the Czech Republic and Poland released on December 3 revealed that although the decline in activity eased somewhat in November, manufacturing continues to suffer. The results offer further support for expectations of a limited rate cut from the National Bank of Poland, but its Czech peer remains out of conventional ammunition.

With Eurozone PMI data recording its 16th straight month of contraction, it's little wonder that neither Central European country could escape something similar.

The Czech Republic, overwhelmingly dominant on Europe for its export market, saw its PMI reading come in at 48.2, which was a slight improvement over recent months - October's 47.2 was the worst since August 2009 - but the vital manufacturing sector continued to shrink for the eighth month. A reading of 50 is considered the threshold between contraction and expansion.

"Weakness in the PMI reading continues to be broad-based, with all components (with the exception of input prices) remaining in contractionary territory," notes RBS. "Worryingly, the new export orders sub-index has been below 50 for 13 consecutive months, highlighting poor economic conditions in core Europe. The latest data confirms the concern of the central bank, which has cut the interest rate to a record low of 0.05% and continues to discuss potential FX intervention to support the key export sector."

However, the Czech central bank has signaled it's unlikely to try unconventional measures until towards mid-2013. With the government apparently unwilling to ease its austerity plans until 2014, the economy looks to have been left to the whims of the Eurozone debt crisis for the meantime. No surprise then that the Czech result was so similar to the readings in the wider Eurozone, with activity continuing to dwindle, just a little more slowly.

Poles apart

By way of contrast, Poland has significant room to offer stimulus to the economy. Until mid-2012, Poland had expected to escape the ravages of Europe's second crisis since 2008, thanks to robust demand from the local economy. However, buffeted by a struggling labour market, the Polish consumer has finally succumbed, which has exposed the economy to rely on exports to a far greater extent, the bulk of which head to the Eurozone.

That has seen the economy slowing strikingly through the year, with the manufacturing sector a major contributor. While the November PMI of 48.2 is an improvement over October's 47.3, Polish manufacturing remained in contraction for the seventh month in a row.

At the same time, the reading was the second improvement in as many months, offering some support to those expecting the National Bank of Poland (NBP) to retain its cautious stance when its monetary policy council meets later this week. Overall, suggests RBS, the November PMI reading together with the softer-than-expected recent third-quarter GDP growth of 1.4% supports further monetary policy easing, starting with a 25-basis-point (bp) rate cut on Wednesday, following the 25bp reduction to 4.50% in November.

But debate over an even deeper reduction of rates is now doing the rounds. As Erste notes, the disappointment of recent economic data has seen proposals for a 50bp cut put on the table. However, even before the improved - if still contracting - PMI release, the hawkish central bank looked a tough challenge for the interest rate doves. "We do not see it as likely that there will be a majority in favor of such a motion," Erste analysts write. "[S]ome members may consider supporting a 50bp cut, as the economic slowdown has become a serious concern. They may, however, have difficulty forming a majority."

Analysts at Capital Economics agree. "November's PMIs provide some - albeit limited - cause for optimism... The Czech and Polish PMIs both rose to their highest level since August, while the Hungarian PMI rebounded following a fall in October."

Yet like so many numbers out of Hungary this year, the country's manufacturing PMI has proved erratic and a poor signal for headline growth. The November PMI reading moved back above the parity line at 52.3 from 49.9 the prior month, highlighting an improvement in manufacturing conditions. RBS notes that it expects the latest swing to feed through to industrial production numbers, which appear to track the manufacturing PMI reading with no lag.

Meanwhile, the administration of monetary policy - split between the Magyar Nemzeti Bank and government-appointed members of the Monetary Policy Committee - is also less than conventional in Budapest. Although the MNB members have made no bones about their opposition to further rate cuts, RBS says it expects the four-cut cycle already underway to continue despite the PMI reading.

"Although the manufacturing sector bounced back into expansion, we expect the current domestic environment of contracting growth and softening inflation pressures - particularly from weak consumption - to prompt further 25bp rate cuts at the upcoming MPC meetings," RBS says.

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